Exh.

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

$1,019.0
1,217.9
2,236.9
2,147.7
89.2
247.0
52.1
-140.2

$1,160.3
1,152.2
2,312.5
2,112.2
200.3
0.0
46.6
117.2

$1,178.8
1,066.1
2,244.9
2,059.5
185.4
44.0
47.9
-51.3

$1,145.7
1,006.6
2,152.3
1,938.5
213.8
0.0
58.5
99.0

$1,113.6
957.0
2,070.6
1,824.0
246.6
0.0
58.4
683.7

$1,058.3
913.4
1,971.7
1,687.4
284.3
0.0
81.3
151.0

$1,091.8
812.9
1,904.7
1,600.5
304.2
40.5
86.2
145.0

$1,048.3
814.6
1,862.9
1,689.1
173.8
151.9
29.0
-22.6

$1,009.3
754.6
1,763.9
1,610.1
153.8
0.0
15.0
125.2

$964.3
664.9
1,629.2
1,493.5
135.7
0.0
18.6
108.2

Common Shares, End of Year (000s)

Common Shares Repurchased (000s)
Repurchase Outlay ($ millions)
Common Shares Issued (000s)

45,533
1,218
$40.2
753

45,998
941
$30.6
133

46,806
0
$0.0
138

46,668
2,258
$63.4
7

48,919
1,151
$30.6
0

50,070
2,040
$55.6
0

52,110
19,525
$950.6
0

71,635
0
$0.0
9,717

61,918
0
$0.0
0

61,918
0
$0.0
0

Earnings Per Share

Dividend Per Share

-$3.09
$0.60

$2.49
$0.60

-$1.10
$0.60

$2.06
$0.60

$12.54
$0.60

$2.20
$0.60

$1.96
$0.60

-$0.34
$0.60

$2.02
$0.60

$1.75
$0.50

Selected Balance Sheet Information

Working Capital
Net Property, Plant & Equipment
Total Assets
Long-Term Debt
Redeemable Preferred Stock
Common Stockholders' Equity

$738.5
691.0
2,261.8
526.7
0.0
717.7

$886.8
747.3
2,316.7
566.0
0.0
864.4

$833.6
718.2
2,212.3
602.3
0.0
767.3

$789.0
657.3
2,008.1
637.4
0.0
808.9

$695.3
549.4
1,889.3
471.8
0.0
772.9

$609.1
461.0
1,701.3
513.8
348.6
207.7

$642.0
430.9
1,776.7
602.2
321.9
148.8

$980.0
433.8
1,957.2
402.3
0.0
1,011.5

$652.6
359.6
1,599.4
0.0
0.0
1,048.2

$602.4
357.7
1,444.6
0.0
0.0
960.1

Addns. to Property Plant and Equip.

Depreciation
Book Value LT Debt/Capital
Market Value LT Debt/Capital

167.9
$132.7
42.3%
19.6%

146.7
$118.2
39.6%
27.5%

165.6
$100.3
44.0%
27.8%

201.5
$89.1
44.1%
30.5%

175.8
$85.5
37.9%
26.6%

120.9
$87.2
48.0%
25.3%

94.5
$87.4
56.1%
28.5%

127.0
$81.9
28.5%
23.4%

116.6
$75.7
0.0%
0.0%

82.9
$71.2
0.0%
0.0%

Selected Valuation Information (at years' ends)

Polaroid Stock Price
$47.38
S&P 500 Index
615.93
Polaroid Average P/E (1)
12.1
S&P Industrials Average P/E (1)
15.2
Polaroid Market/Book Ratio
3.01
Polaroid Beta
1.05
Yield on 30-Year T-Bonds
6.88%
Yield on 90-day T-Bills
5.49%
Total Annual Return on Large Co. Stocks
33.00%

$32.50
459.27
13.3
15.5
1.73
1.05
7.37%
4.25%
1.30%

$33.50
466.25
15.6
18.4
2.04
1.15
6.59%
3.00%
9.90%

$31.13
435.71
14.2
19.8
1.80
1.15
7.67%
3.43%
7.67%

$26.63
417.09
12.2
19
1.69
1.20
8.14%
5.38%
30.55%

$23.38
330.22
15.6
14.4
5.63
1.25
8.61%
7.50%
-3.17%

$22.88
353.40
21.8
12.6
8.01
1.25
8.45%
8.11%
31.49%

$18.38
277.72
NMF
10.8
1.30
1.25
8.96%
6.67%
18.81%

$11.88
247.08
14.7
15.3
0.70
1.20
8.59%
5.78%
5.23%

$33.25
242.17
16.6
17.5
2.14
1.10
7.80%
5.97%
18.47%

Selected Income Statement Information

Net Sales
U.S.
International
Total
Operating Expenses
Profit from Opns. Before Restructuring Exp.
Restructuring Expense
Interest Expense
Net Earnings

Notes:

1. P/E ratios are computed on earnings before restructuring charges, litigation award, and other extraordinary items.

Page 1

Exh. 3

Exhibit 3
Consolidated Statement of Earnings
(In $ millions)
Years ended December 31,
1995
1994
Net Sales
United States
International
Total Net Sales
Cost of Goods Sold
Marketing, Research, & Admin.
Restructuring & Other.
Total Costs
Profit/(Loss) from Operations
Interest Income
Other Income
Interest Expense
Earnings/(Loss) Before Taxes
Tax Expense
Net Earnings/(Loss)

$1,019.0
1,217.9
2,236.9

$1,160.3
1,152.2
2,312.5

1,298.6
849.1
247.0
2,394.7
-157.8

1,324.2
788.0
0.0
2,122.2
200.3

8.7
-0.2
52.1
-201.4
-61.2
-140.2

9.7
-2.7
46.6
160.7
43.5
117.2

Page 2

Exh. 4

Exhibit 4
Consolidated Balance Sheet
(In $ millions)

Assets
Current Assets
Cash and Cash Equivalents
Short-Term Investments
Receivables, less allowances
Inventories
Prepaid Expenses and Other
Total Current Assets
Gross Property Plant and Equipment
Less Accumulated Depreciation
Net Property, Plant and Equipment
Prepaid Taxes -- non-current
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities
Short-Term Debt
Current Portion of Long-Term Debt
Payables and Acrruals
Compensation & Benefits
Taxes Payable
Total Current Liabilities
Long-Term Debt
Accrued Postretirement Benefits
Accrued Postemployment Benefits
Total Liabilities
Preferred Stock
Common Stockholders' Equity
Common Stock (1)
Additional Paid-In Capital
Retained Earnings
Less Treasury Stock, at Cost
Less Deferred Compensation
Total Common Stockholders Equity
Total Liabilities and Stockholders' Equity

1995

1994

$73.3
9.8
550.4
615.5
208.5
1,457.5

$143.3
85.6
541.0
577.4
141.4
1,488.7

2,164.4

2,043.4

1,473.4
691.0
113.3
$2,261.8

1,296.1
747.3
80.7
$2,316.7

$160.4
39.7
274.9
197.4
46.6
719.0
526.7
257.2
41.2
1,544.1
0.0

$117.1
35.9
275.7
121.4
51.8
601.9
566.0
247.2
37.2
1,452.3
0.0

75.4
401.9
1,525.8
1,205.4
80.0
717.7
$2,261.8

75.4
387.2
1,692.1
1,174.5
115.8
864.4
$2,316.7

Page 3

Exh. 6

Exhibit 6
Polaroid Corporation, 1996
Financial Forecast, 1996-2000
(values in U.S. $ millions)

Annual Increase in Sales

Opng. Profit/Sales
Tax Rate
Wkg. Capital/Sales
Dividend Payout Ratio
Income Statement
Net Sales
Operating Profit
Interest Income
Interest Expense
Pre-Tax Income
Tax Expense
Net Income
Dividends
Retentions to Earnings
Balance Sheet
Cash
Working Capital (without debt)
Prepaid Tax
Net Fixed Assets
Total Assets
Debt (long and short term)
Postretirement Benefits
Equity
Total Capital

Actual
1995
-3.2%
4.0%

1996
2.0%
8.0%
40.0%
37.0%
25.0%

1997
5.0%
9.5%

Projected
1998
6.0%
10.0%

1999
6.0%
10.0%

$2,236.9 $2,281.6 $2,395.7 $2,539.5 $2,691.8

89.2
182.5
227.6
253.9
269.2
8.5
5.0
5.0
5.0
5.0
-52.1
(52.1)
(52.1)
(52.1)
(52.1)
45.6
135.4
180.5
206.8
222.1
-61.2
(54.2)
(72.2)
(82.7)
(88.8)
-15.6
81.3
108.3
124.1
133.2
27.3
27.3
27.3
27.3
27.3
$ (42.9) $ 53.9 $ 81.0 $ 96.8 $ 105.9

83.1
855.5
113.3
691.0
1,742.9

$ 148.3
844.2
113.3
691.0
1,796.8

$ 187.1
886.4
113.3
691.0
1,877.8

$ 230.7
939.6
113.3
691.0
1,974.6

$ 280.3
996.0
113.3
691.0
2,080.5

726.8
298.4
717.7
$1,742.9

726.8
298.4
771.6
$1,796.8

726.8
298.4
852.6
$1,877.8

726.8
298.4
949.4
$1,974.6

726.8
298.4
1,055.3
$2,080.5

Free Cash Flows

EBIT
Less Taxes on EBIT
Plus Depreciation
Less Capital Expenditures
Less Additions to/plus Reductions in Wkg. Cap.
Free Cash Flow

$ 182.5 $ 227.6 $ 253.9 $

(73.0)
(91.0)
(101.6)
140.0
140.0
140.0
(140.0)
(140.0)
(140.0)
11.3
(42.2)
(53.2)
$ 120.8 $ 94.3 $ 99.2 $

Page 4

269.2
(107.7)
140.0
(140.0)
(56.4)
105.1

Exh. 6

2000
7.0%
10.0%

$2,880.3
288.0
5.0
(52.1)
240.9
(96.4)
144.6
27.3
$ 117.2

$ 327.8
1,065.7
113.3
691.0
2,197.8
726.8
298.4
1,172.6
$2,197.8

0.50

0.49

0.46

0.43

0.41

0.38

0.50

0.51

0.54

0.57

0.59

0.62

$ 288.0
(115.2)
140.0
(140.0)
(69.7)
$ 103.1

Page 5

Exh. 9

Exhibit 9
Key Industrial Financial Ratios
Three-Year Medians (1993-1995)
AAA
13.50
17.08
98.20%
60.00%
29.30%
22.60%
13.30%
25.90%

Pretax interest coverage (x)

EBITDA Interest coverage (x)
Funds from operations/total debt (%)
Free operating cash flow/total debt (%)
Pretax return on permanent capital (%)
Operating income/sales (%)
Long-term debt/capital (%)
Total debt/capitalization incl. short-term debt (%)
Source: Standard & Poor's CreditWeek October 30, 1996, page 26.

Page 6

AA
9.67
12.80
69.10%
26.80%
21.40%
17.80%
21.10%
33.60%

A
5.76
8.18
45.50%
20.90%
19.10%
15.70%
31.60%
39.70%

BBB
3.94
6.00
33.30%
7.20%
13.90%
13.50%
42.70%
47.80%

BB
2.14
3.49
17.70%
1.40%
12.00%
13.50%
55.60%
59.40%

Exh. 9

B
1.17
2.16
12.80%
-0.90%
9.00%
12.30%
65.50%
69.50%

Page 7

Table1

Exhibit TN1
Analysis of Flexibility by Rating Category

1 Pre-tax Cost of Debt (Exh. 12)

AAA
6.70%

AA
6.90%

A
7.00%

BBB
7.40%

BB
9.00%

B
10.60%

D
D+E

Required for rating category:

2 Book Value Debt/Capital (Book) (Exh. 9)
3 Market/Book Value of Equity Ratio (Exh. 1)
4 Market Value Debt/Capital

25.90%
3.01
10.42%

33.60%
3.01
14.39%

39.70%
3.01
17.95%

47.80%
3.01
23.33%

59.40%
3.01
32.71%

69.50%
3.01
43.09%

E`
=m
E
D/(D+E)
(1 - D/D+E)*M + D/D+E

$ 2,884 $ 2,884 $ 2,884 $ 2,884

$
727 $
727 $
727 $
727
$
300 $
415 $
518 $
673
$ (426) $ (312) $ (209) $
(54)

$ 2,884
$
727
$
943
$
216

$ 2,884
$
727
$ 1,243
$
516

5
6
7
8
9

10
11
12
13
14

Estimate of Unused Debt Capacity

Polaroid Enterprise Value
Mkt Value of Polaroid's Existing Debt
Maximum Debt Implied by Rating
Unused Debt Capacity at current rating
Unused Debt Capacity until InvestmentGrade Rating is lost (at BB)
Estimate of Interest Coverage
Interest Expense
Normalized 5-Year EBIT
Downside EBIT
Coverage Ratio, Normalized EBIT
Coverage Ratio, Downside EBIT

643

528

426

271

(299)

$ 20.13 $ 28.64 $ 36.23 $ 49.78 $ 84.90 $ 131.72

$ 244.3 $ 244.3 $ 244.3 $ 244.3 $ 244.3 $ 244.3
$ 150.0 $ 150.0 $ 150.0 $ 150.0 $ 150.0 $ 150.0
12.1
8.5
6.7
4.9
2.9
1.9
7.5
5.2
4.1
3.0
1.8
1.1

Page 8

-->

D
D + E`

Exhibit TN2
Valuation Analysis

Valuation Analysis
Free Cash Flow (from case Exhibit 6)
Terminal Value (Note 1)
Total FCF
DCF at 10%
Less Debt
Equity
Shares outstanding
Intrinsic Value Per Share
Recent Share Price
Premium of Price vs. Value

$2,095
726.8
$1,368
45.5
$30.04
$47.38
(17.34)

1996
$
1.0 $
$120.8
$120.8

Projected
1997
1998
1999
2000
2.0 $
3.0 $
4.0 $
5.0
$94.3
$99.2
$105.1
$103.1
2,732.1
$94.3
$99.2
$105.1 $2,835.2

109.8296 77.97168 74.51751 71.80778 1760.418

WACC = 10%
G= 6%

Table3

Exhibit TN3
Capital Costs by Rating Category

AAA

AA
6.90%
10.30%

A
7.00%
10.40%

BBB
7.40%
10.50%

BB
9.00%
11.75%

Approach Based on Hudson Guaranty Estimates of Equity Costs

Cost of Debt (after 40% tax)
4.02%
4.14%
Cost of Equity
10.25%
10.30%
Market/Book Ratio (Exh. 1)
3.01
3.01
Debt/Capital (Book) (Exh. 9)
25.90%
33.60%
Debt/Capital (Market)
10.42%
14.39%
Weight of Debt
10.42%
14.39%
Weight of Equity
89.58%
85.61%

4.20%
10.40%
3.01
39.70%
17.95%
17.95%
82.05%

4.44%
10.50%
3.01
47.80%
23.33%
23.33%
76.67%

5.40%
11.75%
3.01
59.40%
32.71%
32.71%
67.29%

9.41%

9.29%

9.09%

9.67%

AA
6.90%
0.88
16.81%
0.97
10.30%

A
7.00%
0.88
21.87%
1.00
10.40%

BBB
7.40%
0.88
30.42%
1.04
10.50%

BB
9.00%
0.88
48.61%
1.14
11.75%

4.14%
11.48%

4.20%
11.62%

4.44%
11.87%

5.40%
12.39%

10.42%

10.29%

10.14%

10.10%

Cost of Debt (pre-tax)

Cost of Equity

WACC (using Mkt. Wts.)

WACC (using Book Wts.)

6.70%
10.25%

9.60%

Alternative Approach Based on CAPM and Levered Beta

AAA
Cost of Debt (pre-tax)
6.70%
Unlevered Beta
0.88
Debt/Equity (Market)
11.63%
Relevered Beta
0.94
Cost of Equity
10.25%
Rf
6.24%
MRP
5.40%
Cost of Debt (after 40% tax)
4.02%
Cost of Equity
11.33%
Market/Book Ratio (Exh. 1)
Debt/Capital (Book) (Exh. 9)
Debt/Capital (Market)
Weight of Debt
Weight of Equity
WACC (using Mkt. Wts.)
WACC (using Book Wts.)

10.57%

Note: Estimation of Polaroid's Unlevered Beta:

Long-term Debt
526.7
Short-term Debt
160.4
Total Debt
687.1
Mkt. Value of Equity
2157
Debt/Capital (market)
0.24
Debt/ Equity (market)
0.32

Levered Beta
Tax Rate
Unlevered Beta

Page 11

1.05
0.40
0.88

Table3

B
10.60%
13.00%

6.36%
13.00%
3.01
69.50%
43.09%
43.09%
56.91%
10.14%

B
10.60%
0.88
75.70%
1.28
13.00%

6.36%
13.16%

10.23%

Page 12

AAA
AA
A
BBB
BB
B
Weighted Average Cost of Capital
CAPM
10.57%
10.42%
10.29%
10.14%
10.10%
10.23%
Hudson
9.60%
9.41%
9.29%
9.09%
9.67%
10.14%
Cost of Equity
AAA
AA
A
BBB
BB
B
CAPM
10.25%
10.30%
10.40%
10.50%
11.75%
13.00%
Hudson
10.25%
10.30%
10.40%
10.50%
11.75%
13.00%

WACC Estimates: CAPM vs. Hudson

11.00%

Cos t of Equity

Cost of Capital

Exhibit TN5

13.50%
13.00%
12.50%
12.00%

10.50%

CAPM -based WACC

10.00%

Hudson's WACCs

11.50%
11.00%
10.50%

9.50%

10.00%

9.00%

9.50%
9.00%

Rating Category

Exhibit TN4

Cos t of Equity

Cos t of Equity: CAPM vs. Huds on

13.50%
13.00%
12.50%
12.00%
11.50%

CAPM

11.00%
10.50%
10.00%
9.50%
9.00%
AAA

AA

A
BBB
Rating Cate gory

BB